Cost Accounting Chapter 10 Solutions Pdf

[Elvisa Schimke]

ASC730-10-25-2(c): ...the costs of intangible assets that are purchased from others for a particular research and development project and that have no alternative future uses and thus have no separate economic values are research and development costs at the time the costs are incurred.

Company A engages a contract research organization (CRO) to perform research activities for a period of two years in connection with a drug compound related to the treatment of HIV. The CRO is well known in the industry for having modern facilities and good practitioners dedicated to investigation. Company A pays the CRO a non-refundable, upfront payment of $3 million in order to carry out the research under the agreement. The CRO will have to present a quarterly report to Company A with the results of its research. Company A has full rights to the research performed, including the ability to control the research undertaken on the potential cure for HIV. The CRO has no rights to use the results of the research for its own purposes.

Although the payment is non-refundable, Company A will receive a future benefit (the rights to the research) as the CRO performs the research services over the two-year period. Therefore, the upfront payment should be capitalized as a prepayment and recognized in the income statement (as research and development expense) based upon the pattern of performance of the CRO in order to properly expense the costs under the arrangement based upon the level of effort necessary to perform the research services. Company A should continue to evaluate whether it expects the goods to be delivered or services to be rendered each reporting period to assess recoverability.

If the payment from Company A to the CRO (or a portion thereof) represents an advance payment for specific materials, equipment, or facilities that will be used for future research and development activities, it would be capitalized as a prepayment and recognized in the income statement as research and development expense when the related goods are delivered. If at any point Company A does not expect the goods to be delivered, the capitalized prepayment should be charged to expense.

ASC 730-20-25-13: Non-refundable advance payments for goods or services that have the characteristics that will be used or rendered for future research and development activities pursuant to an executory contractual arrangement shall be deferred and capitalized.

Company A should record clinical trial expense for work performed by CROs in the period when services are performed, not necessarily when payments are made. An accrual should be recorded based on estimates of services received and efforts expended pursuant to agreements established with CROs and other outside service providers. These estimates are typically based on contracted amounts applied to the number of patients enrolled, the number of active clinical sites, the duration for which the patients will be enrolled in the study and the percentage of work completed to date.

Nonrefundable advance payments for future clinical trial management services should initially be capitalized and then expensed as the related services are performed. Company A should continue to evaluate whether it expects the services to be rendered. If services are not expected to be rendered, the capitalized advance payment should be charged to expense in the period in which this determination is made.

ASC 730-20-25-13: Nonrefundable advance payments for goods or services that have the characteristics that will be used or rendered for future research and development activities pursuant to an executory contractual arrangement shall be deferred and capitalized.

ASC 730-10-25-2(d): Contract services. The costs of services performed by others in connection with the research and development activities of an entity, including research and development conducted by others [on] behalf of the entity, shall be included in research and development costs.

Company A has appointed Company B, an independent third party, to develop an existing compound owned by Company A on its behalf. Company B will act purely as a service provider without taking any risks during the development phase and will have no further involvement after regulatory approval. Company A will retain full ownership of the compound. Company B will not participate in any marketing or production arrangements. Company A will make a $2 million non-refundable payments to Company B on signing the agreement, and an additional payment of $3 million on successful completion of Phase II testing.

The initial upfront payment represents a prepayment for future development by a third party and should be capitalized and then amortized as Company B performs the research using a pattern that accurately depicts performance. Company A should expense the milestone payment when it is probable the payment will be made unless the milestone payment is intended to compensate Company B for future development services. In such instance, Company A should capitalize the milestone payment and amortize it over the performance period in a pattern consistent with the pattern of underlying performance.

Company A entered into a collaboration arrangement with Company B. Company A paid Company B an upfront fee upon signing the arrangement and will pay Company B a discrete milestone payment of $2 million upon FDA approval.

Under the contractual terms of the agreement, the milestone payment becomes payable upon the resolution of a contingency. Company A should accrue the milestone payment when the achievement of the milestone is probable (the amount of the payment is reasonably estimable, as it is a fixed amount under the terms of the arrangement).

Due to the uncertainties associated with the FDA approval process, it may be difficult for Company A to conclude that achievement of the milestone is probable prior to notification of FDA approval. All facts and circumstances regarding the nature of the milestone should be considered when evaluating when the achievement of a milestone is probable.

Information available before the financial statements are issued or are available to be issued... indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements...

Company A has out-licensed the development of an existing compound to Company B, an independent third party, multi-national public company. There was no upfront consideration paid between the parties. Company A will neither retain any involvement in the development of its compound nor participate in the funding of the development. The out-license agreement includes the following terms:

Company A effectively removes its exposure to failure of the development of its compound, having transferred all development risks to Company B. In this case, there are no indicators that would lead to a presumption that the buyback will occur and that a liability should be recognized before any decision to reacquire the rights occurs.

If Company A exercised the buy-back option, it would reacquire the rights to commercialize the intangible asset. Since exercisability of the buy-back option is only triggered upon regulatory approval, the payment made by Company A to reacquire the rights would be capitalized when the option is exercised and then amortized over the useful life of the right.

ASC 730-20-25-3: If the entity is obligated to repay any of the funds provided by the other parties regardless of the outcome of the research and development, the entity shall estimate and recognize that liability. This requirement applies whether the entity may settle the liability by paying cash, by issuing securities, or by some other means.

ASC 730-20-25-4: To conclude that a liability does not exist, the transfer of the financial risk involved with research and development from the entity to the other parties must be substantive and genuine. To the extent that the entity is committed to repay any of the funds provided by the other parties regardless of the outcome of the research and development, all or part of the risk has not been transferred...

Company A has made a non-refundable gift of $3 million to a university. The donation must be used to fund research activities in the area of infectious diseases over a two-year period. Company A has no right to access the research findings.

Company A should expense the donation (generally as selling, general and administrative expense) when incurred (normally when paid) or at the time an unconditional promise to give cash is made, whichever is sooner.

ASC 720-25-25-1: Contributions shall be recognized as expenses in the period made and as decreases of assets or increases of liabilities depending on the form of benefits given. For example...unconditional promises to give cash are recognized as payables and contribution expenses...

ASC 958-720-25-2: Unconditional promises to give shall be recognized at the time the donor has an obligation to transfer the promised assets in the future, which generally occurs when the donor approves a specific grant or when the recipient of the promise is notified...If payments of the unconditional promise to give are to be made to a recipient over several fiscal periods and the recipient is subject only to routine performance requirements, a liability and an expense for the entire amount payable shall be recognized.

Company A, a commercial laboratory, is manufacturing a stock of 20,000 doses (trial batches) of a newly-developed drug using various raw materials. The doses can only be used in patient trials during Phase III clinical testing, and cannot be used for any other purpose. The raw materials can be used in the production of other approved drugs.

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